Finally upgraded my Phat PS3 40Gb to 500GB but it wasn't all smooth sailing. I ran into some hiccups long the way and feared the worst.
With the right right tools removing and replacing the HDD should be easy.
After restarting system again the following message appeared on screen
"Connect the controller using a USB cable, and then press the PS button."
I had the latest firmware saved on a usb stick folder PS3-->UPDATE-->PS3UPDAT.PUP but but just went into a loop saying HDD needs to be reformatted.
I removed the HDD again and connect it to my PC and formatted to Fat32 using this tool.
Replaced HDD and and rebooted again. Then the following message appeared.
"Cannot start. The appropriate system storage was not found."
I was stuck here for more then an hour :( . I tried booting into the save mode menu but no matter I tried its just refused to. Eventually I open my PS again to check if my previous drive still picks up. This is when
I noticed when I replaced the drive I didn't press it all the way in. After rebooting the
message changed back to the "Connect the controller using a USB cable, and then press the PS button."
I was now able to boot to System Restore menu and install firmware from the usb stick :D
The Backup and Restore Function worked perfectly but took about 2hour (1hour backup + 1hour restore) for only 24GB
Tip: To boot into System Restore Menu. With The PS3 in Standby (Redlight) Hold down the power until you hear 2 quick beep then release. In this menu you can reformatted drive, install firmware and even fix Blu-ray reading issues.

